fmcg sector analysis

PROJECT REPORT

Submitted in partial fulfillment of the requirement for the reward of

Post Graduation Program in Business Management

A EQUITY RESEARCHon FAST MOVING CONSUMER GOODS

NAME ROLL NUMBER

Prof. Saravan Krishnamurthy, Kohinoor Business School, Khandala

Miss. Sheela Khatane, HR Head, Motilal Oswal Securities Ltd., Nagpur

PROJECT REPORT



2008

A EQUITY RESEARCHon FAST MOVING CONSUMER GOODS SECTOR

in

: DAIPAYAN LODH : 3015

Under the Supervision of


&




A EQUITY RESEARCH SECTOR



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Presented by | D a i p a y a n L o d h

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Kohinoor Business Old Pune – Mumbai Highway, Khandala

This is to certify that Mr. DAIPAYAN LODH, a student of Post Graduation Program in Business

Management, 2007 – 09 batch has undertaken the project titled

Sector in India” on behalf of “Motilal Oswal Securities Ltd., Nagpur” for duration of three

months.

He has successfully completed the above said project to the best of our satisfaction.

_______________________ Prof. Sarvan Krishnamurthy Project Guide Kohinoor Business School


Kohinoor Business SchoolMumbai Highway, Khandala – 410 301, Dist. Pune


09 batch has undertaken the project titled – “Equity Research on FMCG

in India” on behalf of “Motilal Oswal Securities Ltd., Nagpur” for duration of three


______________ Dr. B. P. Verma Director Kohinoor Business School

D a i p a y a n L o d h

School 410 301, Dist. Pune


“Equity Research on FMCG

in India” on behalf of “Motilal Oswal Securities Ltd., Nagpur” for duration of three


______________ Dr. B. P. Verma

Director Kohinoor Business School

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Declaration

I, DAIPAYAN LODH, a bona

declare that the project titled –

“Motilal Oswal Securities Ltd., Nagpur” in partial fulfillment of the requirements of the Post

Graduation Program in Business Management is my original work.

Date:

Place:


I, DAIPAYAN LODH, a bona-fide student of Kohinoor Business School, Khandala hereby

– “Equity Research on FMCG Sector in India” on behalf of


Graduation Program in Business Management is my original work.


fide student of Kohinoor Business School, Khandala hereby

“Equity Research on FMCG Sector in India” on behalf of


Signature

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Acknowledgement

“There is joy in work. There is no happiness except in the realization that we have

accomplished something” - Henry Ford

The making of any project requires contribution from many people, right from inception till its

completion. In my case also, there had been a few people who have made this happen. It was not

only learning but also an enriching experience.

I am deeply indebted to Dr. B. P. Verma

having allowed me to carry out the project successfully. I specially thank

Krishnamurthy and Prof. Jay

support during the course of the project.

Salim Samsher, Prof. Anjali Kumar

Financial Accounting to me, for being a source of inspiration and for

provided throughout. Their constant follow

meet the deadlines.

I would also like to thanks Mr. Harish Daf

Sheela Kathane, Ms. Neha Dutta

giving me the opportunity to work in his company and gain knowledge related to my project.

I thank my colleagues and friends for providing constant encouragement

grateful to my family for their moral

“Teachers open the door, but you must enter by yourself”


Acknowledgement


Henry Ford


case also, there had been a few people who have made this happen. It was not

only learning but also an enriching experience.

Dr. B. P. Verma, Director, Kohinoor Business School, Khandala for

having allowed me to carry out the project successfully. I specially thank

Prof. Jayasheelan, for his constant guidance, professional help and

e project. I would also like to thanks Prof. Ajit Gaikwad

Kumar , and Prof. Sanjay Ashrit for explaining the concepts of

for being a source of inspiration and for the valuable sugg

constant follow-ups and result orientation ensured that

Mr. Harish Daf , Mr. Harish Mantri , Mr. Prashish Bharne

Ms. Neha Dutta and a special thanks to Mr. Prashant Arun Pimplewar


colleagues and friends for providing constant encouragement and help

for their moral support and understanding.

“Teachers open the door, but you must enter by yourself” - Chinese Proverb




case also, there had been a few people who have made this happen. It was not

, Director, Kohinoor Business School, Khandala for

having allowed me to carry out the project successfully. I specially thank Prof. Sarvan

, for his constant guidance, professional help and

Prof. Ajit Gaikwad , Prof.

for explaining the concepts of

valuable suggestions

ensured that I successfully

Mr. Prashish Bharne, Ms.

Mr. Prashant Arun Pimplewar for


and help. Finally, I am

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Table of Content

TOPICS Page No.

Industry Overview……………………….…………….. 8

Company Overview…………………………………… 10

Research Methodology………………………………... 13

Why FMCG Sector is Analyzed………………………. 14

Overview……………………………………………..... 16

Why India?...................................................................... 17

Trends………………………………………………….. 19

Market Opportunities for Investment………………….. 22

Hindustan Unilever Limited…………………………… 24

Annexure………………………………………………. 48

Bibliography…………………………………………… 56

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Industry Overview

Broking Insights

The Indian broking industry is one of the oldest trading industries that has been around even

before the establishment of the BSE in 1875. Despite passing through a number of changes in the

post liberalisation period, the industry has found its way towards sustainable growth. With the

purpose of gaining a deeper understanding about the role of the Indian stock broking industry in

the country’s economy, we present in this section some of the industry insights gleaned from

analysis of data received through primary research.

Some key characteristics of the 394 broking firms are:

• On the basis of geographical concentration, the West region has the maximum

representation of 52%. Around 24% firms are located in the North, 13% in the South and

10% in the East

• 3% firms started broking operations before 1950, 65% between 1950-1995 and 32% post

1995

• On the basis of terminals, 40% are located at Mumbai, 12% in Delhi, 8% in Ahmedabad,

7% in Kolkata, 4% in Chennai and 29% are from other cities

• From this study, we find that almost 36% firms trade in cash and derivatives and 27% are

into cash markets alone. Around 20% trade in cash, derivatives and commodities

• In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at both

exchanges. In the derivative segment, 48% trade at NSE, 7% at BSE and 45% at both,

whereas in the debt market, 31% trade at NSE, 26% at BSE and 43% at both exchanges

• Majority of branches are located in the North, i.e. around 40%. West has 31%, 24% are

located in South and 5% in East

• In terms of sub-brokers, around 55% are located in the South, 29% in West, 11% in

North and 4% in East

• Trading, IPOs and Mututal Funds are the top three products offered with 90% firms

offering trading, 67% IPOs and 53% firms offering mutual fund transactions

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• In terms of various areas of growth, 84% firms have expressed interest in expanding their

institutional clients, 66% firms intend to increase FII clients and 43% are interested in

setting up JV in India and abroad

• In terms of IT penetration, 62% firms have provided their website and around 94% firms

have email facility

Financial Markets

The financial markets have been classified as cash market, derivatives market, debt market and

commodities market. Cash market, also known as spot market, is the most sought after amongst

investors. Majority of the sample broking firms are dealing in the cash market, followed by

derivative and commodities. 27% firms are dealing only in the cash market, whereas 35% are

into cash and derivatives. Almost 20% firms trade in cash, derivatives and commodities market.

Firms that are into cash, derivatives and debt are 7%. On the other hand, firms into cash and

commodities are 3%, cash & debt market and commodities alone are 2%. 4% firms trade in all

the markets.

In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at both

exchanges. In the equity derivative market, 48% of the broking houses are members of NSE and

7% trade at BSE, while 45% operate in both stock exchanges. Around 43% of the broking houses

operating in the debt market, trade at both exchanges with 31% and 26% firms uniquely at NSE

and BSE respectively.

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Of the brokers operating in the commodities market, 57% firms operate at NCDEX and MCX.

Around 20% and 21% firms are solely in NCDEX and MCX respectively, whereas 2% firms

trade in NCDEX, MCX and NMCE.

Products

The sustained growth of the economy in the past couple of years has resulted in broking firms

offering many diversified services related to IPOs, mutual funds, company research etc.

However, the core trading activity is still the predominant form of business, forming 90% of the

firms in the sample. 67% firms are engaged in offering IPO related services. The broking

industry seems to have capitalized on the growth of the mutual fund industry, which was pegged

at 40% in 2006. More than 50% of the sample broking houses deal in mutual fund investment

services. The average growth in assets under management in the last two years is almost 48%.

Company research is another lucrative area where the broking firms offer their services; more

than 33% of the firms are engaged in providing company research services. Additionally, a host

of other value added services such as fundamental and technical analysis, investment banking,

arbitrage etc are offered by the firms at different levels.

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Company OverviewMotilal Oswal Financial Services Ltd. (MOFSL) is

company focused on wealth creation for

clients, HNI and retail customers

commodity broking, distribution of third party products, investment banking and venture capital

management.

Mr. Motilal Oswal and Mr. Raamdeo Agrawal laid the foundation for MOFSL and initially

conducted business as a sub-broking firm. Thus, began the expediti

organisation with strong value systems, to provide investment advice to investors.

Today, Motilal Oswal Financial Services Ltd. is a well

institutional investors in India, with a presence in

cities.

From a sub-broking firm, Motilal Oswal Financial Services Ltd. has today become a solid

financial services company straddling a spectrum of businesses in the financial services space.

These businesses include Wealth Management, Institutional Equities, Investment Banking and

Venture Capital Management.

Motilal Oswal Financial Services Limited is the holding company of the following five

subsidiaries:


Company Overview ervices Ltd. (MOFSL) is a well-diversified, financial services

company focused on wealth creation for all its customers, such as institutional and corporate

retail customers. Our services and product offerings include equity broking,

dity broking, distribution of third party products, investment banking and venture capital


broking firm. Thus, began the expedition of building a professional


Today, Motilal Oswal Financial Services Ltd. is a well-established brand among retail and

institutional investors in India, with a presence in over 1430 business locations across over 430

broking firm, Motilal Oswal Financial Services Ltd. has today become a solid


clude Wealth Management, Institutional Equities, Investment Banking and



diversified, financial services

customers, such as institutional and corporate

. Our services and product offerings include equity broking,

dity broking, distribution of third party products, investment banking and venture capital


on of building a professional


established brand among retail and

over 1430 business locations across over 430

broking firm, Motilal Oswal Financial Services Ltd. has today become a solid


clude Wealth Management, Institutional Equities, Investment Banking and


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MOFSL Businesses

Wealth Management and Retail & Distribution

MOFSL offer Wealth Management Services, Broking & third party products to retail customers

through MOFSL, MOSL and MOCBPL. They also provide financing services, investment

advisory, financial planning and portfolio management services (PMS) to their clients. As at

March 31, 2008, they had 461,699 registered customers, to whom they provide equity &

commodities brokerage and PMS.

As at March 31, 2008, they had a total of 340,843 depository clients. They classify their clients

into three segments - 'mass retail', 'mass affluent' (addressed by a separate offering called 'MOSt

Select'), and 'high net worth' (addressed by a separate offering called 'Purple').

Institutional Broking

They offer equity broking services in the cash and derivative segments through MOSL to

institutional clients in India and overseas. These clients include companies, mutual funds, banks,

financial institutions, insurance companies, and FIIs. As at March 31, 2008, they were

empanelled with over 300 institutional clients including 191 FIIs.

Investment Banking

They offer financial advisory services relating to mergers and acquisitions (domestic and cross-

border), divestitures, restructurings and spin-offs through MOIAPL. They also offer capital

raising and other investment banking services such as the management of public offerings,

private placements (including qualified institutional placements), rights issues, share buybacks,

open offers/delistings and syndication of debt and equity.

Private Equity

In 2006, their private equity subsidiary, MOVCAPL was appointed as the investment manager

and advisor to a private equity fund, India Business Excellence Fund, which was launched with a

target of raising US$100 million. The fund is aimed at providing growth capital to small and

medium enterprises in India, with investments typically in the range of US$3 million to US$7

million.

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Research Methodology The project study has been done with the help of observation and analytical method. The value

of the observation is that one can collect the original data at the time they occur and analysis

them in a proper way with the help of varies financial tools and techniques. For this research, we

have to depend on the financial result of the respective company as well as the daily price trends

of that particular script.

The goal of this research is to provide a foundation for understanding FMCG sector through

fundamental analysis. Fundamental analysis is the cornerstone of investing. In fact, some would

say that you aren't really investing if you aren't performing fundamental analysis. There are an

endless number of investment strategies that are very different from each other, yet almost all use

the fundamentals. The biggest part of fundamental analysis involves delving into the financial

statements. Also known as quantitative analysis, this involves looking at revenue, expenses,

assets, liabilities and all the other financial aspects of a company. My research looks at the

information to gain insight on a company's future performance.

Fundamental analysis serves to answer questions, such as:

1. Is the company’s revenue growing?

2. Is it actually making a profit?

3. Is it in a strong-enough position to beat out its competitors in the future?

4. Is it able to repay its debts?

5. Is management trying to "cook the books"?

It all really boils down to one question: Is the company’s stock a good investment? Think of

fundamental analysis as a toolbox to help you answer this question.

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Why FMCG Sector is TATA Investment Corporation Limited, non

Bank of India under the 'Investmen

primarily of investing in long-term investments in equity shares and

in a wide range of industries.

TICL invested in almost all the sectors. TICL’s portfolio proved to be a very successful

portfolio. They had got a very good return from all the sectors. Among these sectors, Fast

Moving Consumer Goods (FMCG) proved to be a very successful sector. It has a very good

potentiality in long term in India.

crores and on May 20, 2008, this investment valued Rs. 306.72 crores

investment in FMCG sector was 5% of the overall investment that was increased in 2008 to 15%

of the overall investment. Thus from this, we can c

value of investment. For this signi

malls, etc. in India, the FMCG sector is one of the booming

had chosen this sector for my equity analysis. Below, I had given a

detail investment of TICL in FMCG sector:


FMCG Sector is Analyzed: Investment Corporation Limited, non-banking financial company registered with Reserve

'Investment Company' category. The company's activities comprise

term investments in equity shares and other securities of companies

invested in almost all the sectors. TICL’s portfolio proved to be a very successful

rtfolio. They had got a very good return from all the sectors. Among these sectors, Fast


potentiality in long term in India. The overall cost of investment in FMCG secto

crores and on May 20, 2008, this investment valued Rs. 306.72 crores, i.e. the cost of value of


Thus from this, we can conclude that, there is a 2140.47%

For this significant increase and also recent development of retails shops,

malls, etc. in India, the FMCG sector is one of the booming sectors in India. For this reason, I

sector for my equity analysis. Below, I had given a chart, which

detail investment of TICL in FMCG sector:


banking financial company registered with Reserve

The company's activities comprise

other securities of companies

invested in almost all the sectors. TICL’s portfolio proved to be a very successful

rtfolio. They had got a very good return from all the sectors. Among these sectors, Fast


The overall cost of investment in FMCG sector was Rs. 13.69

, i.e. the cost of value of


2140.47% increase in

ficant increase and also recent development of retails shops,

in India. For this reason, I

chart, which explains, the

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From the given charts, I can rank the top most companies in FMCG sector in TICL’s portfolio.

They can be ranked as follows:

Rank Company 1 Hindustan Unilever Ltd. 2 Tata Tea Ltd. 3 Asian Paints India Ltd. 4 Nestle India Ltd. 5 Indian Tobacco Company Ltd. 6 Marico Industries Ltd. 7 Godrej Consumer Products Ltd.

Among these companies, I had chosen three major companies for the Equity Analysis, i.e.:

• Hindustan Unilever (HUL) Ltd.

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13.6

9.7 8.7 7.4

0

5

10

15

20

25

30

35

40

45

Fabric Wash

Personal Wash

Dishwash Skin

Market Leader

Overview Products which have a quick turnover, and relatively low cost are known as Fast Moving

Consumer Goods (FMCG). FMCG products are those that get replaced within a year.

of FMCG generally include a wide range of frequently purchased consumer products such as

toiletries, soap, cosmetics, tooth cleaning products, shaving products and detergents, as well as

other non-durables such as glassware, bulbs, batteries, pape

may also include pharmaceuticals, consumer electronics, packaged food products, soft drinks,

tissue paper, and chocolate bars.

Subsets of FMCGs are Fast Moving Consumer Electronics which include innovative electronic

products such as mobile phones, MP3 players, digital cameras, GPS Systems and Laptops. These

are replaced more frequently than other electronic products.

In 2005, the Rs. 48,000-crore FMCG segment was one of the fast growing industries in India.

According to the AC Nielsen India study, the industry grew 5.3% in value between 2004 and

2005.


23.7

14.5

20.8

39.1

3.4

Shampoo Tacum Powder

Packet Tea

Coffee Jams

Market Leader

0

10

20

30

40

50

60

Toothpaste

Strong No. 2

Products which have a quick turnover, and relatively low cost are known as Fast Moving

Consumer Goods (FMCG). FMCG products are those that get replaced within a year.



durables such as glassware, bulbs, batteries, paper products, and plastic goods. FMCG



ducts such as mobile phones, MP3 players, digital cameras, GPS Systems and Laptops. These

are replaced more frequently than other electronic products.

crore FMCG segment was one of the fast growing industries in India.

the AC Nielsen India study, the industry grew 5.3% in value between 2004 and


48.8

30.3

ToothpasteKetchups

Strong No. 2

Products which have a quick turnover, and relatively low cost are known as Fast Moving

Consumer Goods (FMCG). FMCG products are those that get replaced within a year. Examples



r products, and plastic goods. FMCG



ducts such as mobile phones, MP3 players, digital cameras, GPS Systems and Laptops. These

crore FMCG segment was one of the fast growing industries in India.

the AC Nielsen India study, the industry grew 5.3% in value between 2004 and

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3473

847631 540 476 338 361

Turnover $ Mln

Why India?

Large Domestic Market

The Indian FMCG sector is the fourth largest in the economy and has a market size of US$13.1

billion. Well-established distribution networks, as well as intense competition between the

organized and unorganized segments are the characteristics of this sector. FMCG in India has a

strong and competitive MNC presence across the entire value chain. It has been

the FMCG market will reach to US$ 33.4 billion in 2015 from US $ billion 11.6 in 2003. The

middle class and the rural segments of the Indian population are the most promising market for

FMCG, and give brand makers the opportunity to convert

product categories like jams, toothpaste, skin care, shampoos, etc, in India, have low per capita

consumption as well as low penetration level, but the potential for growth is huge.


323 308 218

Turnover $ Mln

11.5

3.32.1

1.5 1.3 1 0.9

Market Capitalization $ Bln


established distribution networks, as well as intense competition between the


strong and competitive MNC presence across the entire value chain. It has been



FMCG, and give brand makers the opportunity to convert them to branded products. Most of the




0.7 0.7 0.6

Market Capitalization $ Bln


established distribution networks, as well as intense competition between the


strong and competitive MNC presence across the entire value chain. It has been predicted that



them to branded products. Most of the



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7%

7%

4%

10%

2%

5%

2%1%

8%

40%

8%2% 4%

Consumption Pie

Clothing

Consumer Durable

Vacation

Eating Out

Foot Wear

Movies & Theatre

Entertainment

Accessories

Books & Music

Grocery

India – A Large Consumer Goods Spender

An average Indian spends around 40 per cent of his income on grocery and 8 per cent on

personal care products. The large share of fast moving consumer goods (FMCG) in total

individual spending along with the large population base is another factor that makes India one

of the largest FMCG markets.

Change in the Indian Consumer Profile

Consumer Profile

1999 2001 2006

Populations (in millions) 846 1,012 1,087

Population < 25 years of Age 480 546 565

Urbanization (%) 26 28 31 Source: Statistical Outline of India (2002-03).

Rapid urbanization, increased literacy and rising per capita income, have all caused rapid growth

and change in demand patterns, leading to an explosion of new opportunities. Around 45 per cent

of the population in India is below 20 years of age and the young population is set to rise further.

Aspiration levels in this age group have been fuelled by greater media exposure, unleashing a

latent demand with more money and a new mindset.

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FMCG Category and Products

Category Products

Household Care

Fabric wash (laundry soaps and synthetic detergents); household cleaners

(dish/utensil cleaners, floor cleaners, toilet cleaners, air fresheners,

insecticides and mosquito repellents, metal polish and furniture polish).

Food and Beverages

Health beverages; soft drinks; staples/cereals; bakery products (biscuits,

bread, cakes); snack food; chocolates; ice cream; tea; coffee; soft drinks;

processed fruits, vegetables; dairy products; bottled water; branded flour;

branded rice; branded sugar; juices etc.

Personal Care Oral care, hair care, skin care, personal wash (soaps); cosmetics and

toiletries; deodorants; perfumes; feminine hygiene; paper products.

Analysis of FMCG Sector

Strengths: Weakness:

• Low Operational Costs • Presence of established distribution

networks in both urban and rural areas • Presence of well-known brands in

FMCG sector

• Lower scope of investing in technology and achieving economies of scale, especially in small sectors

• Low exports levels • “Me-too” products, which illegally

mimic the labels of the established brands. These products narrow the scope of FMCG products in rural and semi-urban market.

Opportunities: Threats:

• Untapped rural market • Rising income levels, i.e. increase in

purchasing power of consumers • Large domestic market- a population of

over one billion. • Export potential • High consumer goods spending

• Removal of import restrictions resulting in replacing of domestic brands

• Slowdown in rural demand

• Tax and regulatory structure

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Trends

The Structure

The Indian FMCG sector is the fourth largest sector in the economy and creates employment for

three million people in downstream activities. Within the FMCG sector, the Indian food

processing industry represented 6.3 per cent of GDP and accounted for 13 percent of the

country's exports in 2003-04. A distinct feature of the FMCG industry is the presence of most

global players through their subsidiaries (HUL, P&G, Nestle), which ensures new product

launches in the Indian market from the parent's portfolio.

Critical Operating Rules in FMCG Sector

• Heavy launch costs on new products on launch advertisements, free samples and product

promotions.

• Majority of the product classes require very low investment in fixed assets.

• Existence of contract manufacturing.

• Marketing assumes a significant place in the brand building process.

• Extensive distribution networks and logistics are key to achieving a high level of

penetration in both the urban and rural markets.

• Factors like low entry barriers in terms of low capital investment, fiscal incentives from

government and low brand awareness in rural areas have led to the mushrooming of the

unorganized sector.

• Providing good price points is the key to success.

Rural Markets: Small is Beautiful

By the early nineties FMCG marketers had figured out two things:

• Rural markets are vital for survival since the urban markets were getting saturated.

• Rural markets are extremely price-sensitive.

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0

10

20

30

40

50

60

Very Rich Consuming Class

2

26

5

per

cent

Household Income Distribution

Thus, a number of companies followed the strategy of launching a wide range of package sizes

and prices to suit the purchasing preferences of India's varied consumer segments. Hindustan

Unilever, a subsidiary of Unilever, coined the term nano

introduced its products in small sachets. Small sachets were introduced in almost all the FMCG

segments from oil, shampoo, and detergents to beverages.

Consumer

Demand for FMCG products is set to boom by almost 60 per cent by 2007 and more than 100

per cent by 2015. This will be driven by the rise in share of middle class (defined as the climbers

and consuming class) from 67 per cent in 2003 to 88 per cent in 2015. The boom

consumer categories, further, indicates a latent demand for various product segments. For

example, the upper end of very rich and a part of the consuming class indicate a small but rapidly

growing segment for branded products. The middle segment

market for the mass end products.


Consuming Class

Climbers Aspirants Destitutes

26

41

18

13

54

34

4

Household Income Distribution

2003 2015



ever, a subsidiary of Unilever, coined the term nano-marketing in the early nineties, when it


segments from oil, shampoo, and detergents to beverages.

Consumer -Class Boom

Source: HU

FMCG products is set to boom by almost 60 per cent by 2007 and more than 100


and consuming class) from 67 per cent in 2003 to 88 per cent in 2015. The boom



growing segment for branded products. The middle segment, on the other hand, indicates a large

market for the mass end products.


Destitutes

13

3



the early nineties, when it


Source: HUL, NCAER. .

FMCG products is set to boom by almost 60 per cent by 2007 and more than 100


and consuming class) from 67 per cent in 2003 to 88 per cent in 2015. The boom in various



, on the other hand, indicates a large

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Market Opportunities for Investment

Measuring the Opportunity: Domestic FMCG Market to treble

According to estimates based on China's current per capita consumption, the Indian FMCG

market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. The dominance

of Indian markets by unbranded products, change in eating habits and the increased affordability

of the growing Indian population presents an opportunity to makers of branded products, who

can convert consumers to branded products.

Sectoral Opportunities

According to the Ministry of Food Processing, with 200 million people expected to shift to

processed and packaged food by 2010, India needs around US$ 28 billion of investment to raise

food processing levels by 8-10 per cent. In the personal care segment, the lower penetration rates

also present an untapped potential. Key sectoral opportunities are mentioned below:

• Staple: Branded and Unbranded: Investment in branded staples is likely to rise with the

popularity of branded rice and flour among urban population.

11.6

33.4

0

5

10

15

20

25

30

35

40

India - 2003 India - 2015

FMCG Market Size (US$ billion)

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• Dairy Based Products: Investment opportunities exist in value-added products like

desserts, puddings etc. The organized liquid milk business is in its infancy and also has

large long-term growth potential.

• Packaged Food: Growth of dual income households, where both spouses are earning, has

given rise to demand for instant foods, especially in urban areas. Increased health

consciousness and abundant production of quality soya-bean also indicates a growing

demand for soya food segment.

• Personal Care and Hygiene: Rapid urbanization is expected to propel the demand for

cosmetics to 100,000 metric tonnes by 2011-12, with an annual growth rate of 10 per

cent.

• Beverages: According to CIER, demand for coffee is expected to rise to 535,000 metric

tonnes by 2012, with an annual growth rate of 5 per cent between 2006-12.

• Edible Oil : The demand for edible oil in India, according to CIER, is expected to rise to

21 million tonnes by 2011-12 with an annual growth rate of 7 per cent per annum.

• Confectionary: The explosion of the young age population in India will trigger a spurt in

confectionary products. In the long run the industry is slated to grow at 8 to 10 per cent

annually to 870,000 metric tonnes by 2011-12.

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Hindustan Unilever Limited

Overview

Hindustan Unilever Limited, erstwhile Hindustan Lever Limited (also called HLL),

headquartered in Mumbai, is India's largest consumer products company, formed in 1933 as

Lever Brothers India Limited. Its 41,000 employees are headed by Mr. Harish Manwani, the

non-executive chairman of the board. HUL is the market leader in Indian products such as tea,

soaps, detergents, as its products have become daily household name in India. The Anglo-Dutch

company Unilever owns a majority stake in Hindustan Lever Limited.

Recently in February 2007, the company has been renamed to "Hindustan Unilever Limited" to

provide the optimum balance between maintaining the heritage of the Company and the future

benefits and synergies of global alignment with the corporate name of "Unilever".

Brands

6 Mega Brands ~ $ 150 to 200 million each, 53% FMCG Portfolio

25 | P a g e


Home & Personal Care

Personal Wash: Laundry:

• Lux • Lifebouy • Liril • Hamam

• Surf Excel • Rin • Wheel

Hair Care: Deodorants:

• Sunsilk Naturals • Clinic

• Axe • Rexona

Ayurvedic Personal and Health Care: Skin Care:

• Ayush • Breeze • Dove • Peers • Rexona

• Fair & Lovely • Pond’s • Vaseline

Oral Care: Colour Cosmetics:

• Pepsodent • Closeup

• Lakme

Foods

Tea: Coffee:

• Brooke Bond • Lipton

• Brooke Bond Bru

Foods: Ice-Cream:

• Kissan • Annapurna • Knorr

• Kwality Wall’s

Hindustan Lever Network

Started in 2003, Hindustan Unilever Network (HLN) is HUL's Direct Selling arm. It already has

about 3.5 lakh consultants - all independent entrepreneurs, trained and guided by HLN's expert

managers and trainers. HLN offers you to build a business with different categories of Home &

Personal Care (HPC) and Food products. They are all essential household needs. And they are all

exclusive to HLN, specifically developed for the Direct Selling channel, and not available in the

retail channel.

26 | P a g e


Water

Hindustan Unilever Limited has launched Pureit, the most advanced in-home water

purifier in the world. It is the only purifier that gives you water that is ‘as safe as

boiled water'™ without boiling, and without needing electricity or continuous tap

water supply.

Exports

Over time HUL has developed into a viable & competitive sourcing base for Unilever world

wide in Home and Personal Care & Foods & Beverages category of products. HUL is also a

global marketing arm for select licensed Unilever brands and also works on building categories

with core country advantage such as branded basmati rice.

Management Structure

Hindustan Unilever Limited is India's largest Fast Moving Consumer Goods (FMCG) Company.

It is present in Home & Personal Care and Foods & Beverages categories. HUL and Group

companies have about 16,000 employees, including 1200 managers.

Board

Mr. Harish Manwani Chairman

Mr. Nitin Paranjpe CEO and Managing Director

Mr. D. Sundaram Vice Chairman and CFO

Mr. Sanjiv Kakkar

Director

Mr. Dhaval Buch

Mr. D. S. Parekh

Mr. C. K. Prahalad

Mr. A. Narayan

Mr. S. Ramadorai

Mr. R. A. Mashelkar

27 | P a g e


Listing Details of Equity Shares

Name of the Stock Exchange Stock Code

Bombay Stock Exchange Limited 500696

National Stock Exchange of India Limited HINDUNILVR

The listing fee for the financial year 2007-2008 has been paid to the above stock exchanges. The

ISIN Number allotted to the Company’s equity shares of face value of Re. 1/- each under the

depository system is INE030A01027 and it’s belong to the BSE Group A. The Company Forms

A Part Of The Following Indices:

• Sensex

• Nifty

• BSE-100

• BSE-200

• S&P CNX 500

• CNX FMCG

Shareholding Pattern as on December 31, 2007

16%

15%

1%

52%

16%

Percentage

Foreign Holdings (15.44%) Govt. / Financial Institutions (15.2%)

Corporate Bodies(not covered above) (0.89%) Directors and their Relatives (52.11%)

Other including Indian Public (16.31%)

28 | P a g e


Categories of Shareholders as on December 31, 2007

Bifurcation of Shares Held in Physical and DEMAT Form as on December 31, 2007

Particulars Percentage

Physical Segment:

Unilever & its Associates 52.12

Others 4.57

DEMAT Segment:

National Securities Depository Limited 42.47

Central Depository Services (India) Limited 0.84

Total 100

Dividend

The Board of Directors at their meeting held on 13th February, 2008 recommended a final

dividend of Rs. 3/- for Equity Shares of face value of Re. 1/- each for the year 2007, subject to

the approval of the shareholders. Together with the Interim Dividend of Rs. 3/- per share paid on

22nd August, 2007 and the Platinum Jubilee Dividend of Rs. 3/- per share paid on 22nd

November, 2007, the Total Dividend for the year works out to Rs. 9/- per share. Final dividend,

if approved, will be paid on or after 8th April, 2008.

52.12

2.470.35

12.56

14.29

1.12 0.29

0.01

16.79

Percentage

Unilever and its associates Mutual Funds & Unit Trust of IndiaFinancial Institutions/Banks Insurance CompaniesForeign Institutional Investors Bodies CorporateNRIs/Foreign Bodies Corporate/Foreign Nationals Directors and their RelativesResident Individuals and Others

29 | P a g e


Mergers/Acquisitions/Joint Ventures and Disposals

1. Divestment of “Sangam Direct”

In March 2007 "Sangam Direct" a non-store home delivery retail business, operated by

Unilever India Exports Limited (UIEL), a fully owned subsidiary of HUL was transferred

to Wadhavan Foods Retail Pvt. Limited (WFRPL) on a slump sale basis.

2. Amalgamation of Modern Foods Industries (India) Limited and Modern Foods and

Nutrition Industries Limited with Hindustan Unileve r Limited

HUL had sought approval from the shareholders and the Courts to merge the above

Companies as of 30th September, 2006. While the shareholder approvals were received

in 2006, HUL received approvals from the High Courts of Mumbai and Delhi in March

Quarter 2007. Thus the two companies have been merged with your Company w.e.f. 1st

October, 2006.

3. Demerger of the Non-Operational Facilities in Shamnagar, Jamnagar and the

“Janmam” Land into Separate Companies

HUL had undertaken demerger of its nonoperational facilities in Shamnagar, Jamnagar

and Nilgiris district into three independent and separate companies, being 100%

subsidiaries of the Company known as Shamnagar Estates Pvt. Limited, Jamnagar

Properties Pvt. Limited and Daverashola Estates Private Limited (Formerly known as

Hindustan Kwality Walls Foods Private Limited).

4. Joint Venture with Smollan Holdings

HUL has entered into a strategic tie-up through a Joint Venture (JV) with Smollan

Holdings of South Africa, which aims to build long term capabilities and bring ‘in-store’

execution focus in servicing the Company’s Modern Trade customers. Smollan Holdings

is one of the leading ‘in-store execution and field services’ companies internationally. It

has leading edge capabilities in servicing Modern Trade focused on shelf filling, logistics

for merchandising materials and in-store execution.

30 | P a g e


Project Shakti - Changing Lives in Rural India

Hindustan Unilever’s Project Shakti is a rural initiative that targets small villages with a

population of less than 5000. It is a unique win-win initiative that empowers women in rural

India even as it benefits the business. Project Shakti impacts society in three favorable ways –

Shakti Entrepreneur program creates livelihood opportunities for underprivileged rural women;

Shakti Vani program improves quality of life by spreading health and hygiene awareness and;

iShakti community portal empowers rural community by creating access to information. Parallel,

Project Shakti benefits your business by significantly enhancing its direct rural reach, and by

enabling Company’s brands to communicate effectively in regions not touched by any media.

Objectives

• To Reach:

• Small, scattered settlements and poor infrastructure make distribution difficult.

• Over 500,000 villages not reached directly by HUL.

• To Communicate:

• Low literacy hampers effectiveness of print media.

• Poor media-reach: 500 million Indians lack TV and radio

• To Influence:

• Low category penetration, consumption, brand awareness

• Per capita consumption in Unilever categories is 33% of urban levels

Initiatives

• Shakti entrepreneur; currently ~ 44000 women cover 1,25,000 villages

• Shakti Vani: one-to-many communication for category growth

• iShakti: customized interaction with remote consumers

Impact on Community

• Business and social impact can go together

• Partnerships with diverse stakeholders

31 | P a g e


Financial Overview

Ratio Analysis

Liquidity Ratios

Dec ' 07 Dec ' 06 Dec ' 05 Dec ' 04 Dec ' 03

Current Ratio 0.69 0.74 0.70 0.95 0.97

Quick Ratio 0.24 0.33 0.32 0.47 0.52

Inventory Turnover Ratio 8.20 9.27 9.97 8.23 8.78

Debtors Velocity (Days) 11 12 12 11 10

Creditors Velocity (Days) 87 85 81 78 81

0

0.2

0.4

0.6

0.8

1

1.2

Dec'03 Dec'04 Dec'05 Dec'06 Dec'07

Current Ratio Quick Ratio

8.788.23

9.979.27

8.2

0

2

4

6

8

10

12


Inventory Turnover Ratio

0

10

20

30

40

50

60

70

80

90

100


Debtors Velocity

Creditors Velocity

32 | P a g e


Current Ratio of HUL has been less than 1 for all the 5 years taken for analysis. This implies that

working capital of HUL is always negative. This is generally considered an aggressive strategy

i.e. to financing its long term asset by short term sources that increases profitability because

current liabilities are non interest bearing items. There is significant difference between CR and

LR which indicates that the current asset of HUL consists of good amount of inventory. Value of

sundry debtors is quite low since there is minor difference between LR and ACR. The liquidity

ratios have decreased from previous year which shows that HUL has reduced its liquidity further.

On analyzing the operating cycle it can be said that HUL takes good amount of time to pay its

creditors and this is how it manage to run its operations with negative working capital.

Solvency Ratios


Total Debt/Equity 0.06 0.02 0.02 0.70 0.79

Interest Coverage 82.73 171.46 85.57 12.42 33.47

Debt to Total Assets 0.018 0.016 0.014 0.311 0.355

Reserve to Total Assets 0.254 0.548 0.497 0.396 0.400

00.10.20.30.40.50.60.70.80.9


Total Debt/Equity Debt to Total Assets Reserve to Total Assets

33.4712.42

85.57

171.46

82.73

0

50

100

150

200


Interest Coverage Ratio

33 | P a g e


The loans taken by HUL were high in 2004 which is indicated by high debt to total source ratio

and this is why its ICR ratio was low (as compared to ICR in 2007 and 2006). It has decreased its

loan and currently it is financing its business mostly by net worth and current liability. Debt to

equity ratio has decreased over the years as it has reduced the loans, but in 2007, debt/equity

ratio has increased. This implies that HUL is relying less on its owner equity to finance its assets

rather than on borrowed funds. Its RS to Total source has decreased which indicates that HUL

invests accumulated profit into business with increasing debt.

Profitability Ratios


Operating Margin (%) 14.95 14.74 14.14 15.32 20.58

PBT/Net Sales (%) 17.01 18.12 14.65 14.95 21.45

Gross Profit Margin (%) 13.96 13.68 13.03 14.12 19.36

Net Profit Margin (%) 12.58 14.94 12.42 11.68 16.84

Return On Net Worth (%) 82.89 61.48 64.05 56.61 61.14

Return on Total Assets (%) 49.03 48.10 39.15 34.16 46.58

Return on Capital Employed (%) 97.61 71.34 55.46 43.62 59.13

Earning Per Share 8.73 8.41 6.40 5.44 8.05

Dividend Per Share 9.00 6.00 5.00 5.00 5.50

CFO/PBIT 0.714 0.725 1.198 0.806 0.661

0

5

10

15

20

25


Gross Profit Margin Net Profit Margin

34 | P a g e


PBIT as percentage of sales is moderately good and there has been significant change in it during

last three years. Similar is the case of PBT/Sales. PBT/Sales are higher than the PBIT/Sales for

year 2007 and 2006 which indicate that PBT is more than PBIT. This implies that interest paid

by the company is negative. On closely watching the financial statement, it has been found that

Net Income from Interest for HUL is positive for the years 2007 and 2006 making PBT higher

than PBIT. That is because Income Received by the company is more than that to be paid. There

has not been any significant change in operating expense as percentage of sales in last three

years. For FMCG business the operating expense to sales ratio around 30% can be considered

good as the company has to spend heavily on its distribution network and promotional activities.

The profit distributing ability of the firm is excellent with return on net worth (RONW) being

around 82.89% over the years. The profit generating ability similar to the profit distributing

ability is pretty good with ROCE over 97.61% during the year 2007. ROCE in year 2006 has

increased from the figure of 2005, perhaps because of the decrease in debt (change in capital

structure) and increase in current liability (non interest bearing item). Return on total asset

(ROTA) has been moderately good with almost constant value of around 43.40% over the years.

0

20

40

60

80

100

120


RONW ROTA ROCE

0

2

4

6

8

10


EPS DPS

35 | P a g e


The face value of Equity Share of HUL is Rs. 1. Analyzing the EPS and DPS, which are profit

distributing ability ratios, for HUL we can see that it has been generating more than 500% times

profit for its shareholders over the years. The EPS increased over the years from Rs.5.xx in year

2004 to Rs. 8.xx in year 2007. It has been generous in distributing the profit in form of dividend

with DPS Rs. 5.00 in year 2004 and Rs. 9.00 in year 2007.

The trend of CFO/PBIT is worth analyzing since the company’s CFO is close to its PBIT which

indicates that almost entire profit of HUL comes from its operation and the profit is realized. In

year 2005 the CFO is higher than PBIT indicating the negative CFF or CFI i.e. the company has

realized the profit(in form of cash) and invested in long term assets or paid its long term outside

liabilities(loans).

0.6610.806

1.198

0.725 0.714

0

0.2

0.4

0.6

0.8

1

1.2

1.4


CFO/PBIT

36 | P a g e


Market Based Return


Price to Earning Ratio 29.67 28.61 34.79 30.02 32.24

Market Capitalization 47222.70 47786.09 43418.67 31587.22 45058.56

P.B. Ratio 32.826 17.550 18.837 15.099 21.075

PER ratio for HUL is not so good with values over 30 in year 2007 and 2006 and somewhat

better with value around 30 in the year 2007. It means an investor will get return around 1/30

times on his actual investment. Market capitalization of HUL has increased after 2004, but there

is a small decrease in the year 2007.

0

5

10

15

20

25

30

35

40


Price to Earning Ratio P.B. Ratio

45.05856

31.58722

43.4186747.78609 47.2227

0

10

20

30

40

50

60


Tho

usan

ds

Market Capitalization

37 | P a g e

Economic Value Added

(Rs. crores) Cost of Capital Employed (COCE)1 Average Debt 2 Average Equity 3 Average Capital Employed : (1) + (2)4 Cost of Debt, post5 Cost of Equity %6 Weighted Average Cost of Capital 7 COCE : (3) x (6)Economic Value Added (EVA)8 Profit after tax, before exceptional items9 Add : Interest, after taxes10 Net Operating Profits After Taxes (NOPAT)11 COCE, as per (7) above12 EVA : (10) - (11)

• Cost of debt is taken at the effective rate of interest applicable to an “AAA” rated

company like HUL with an appropriate mix of short, medium and long term debt, net of

taxes. I had considered a pre tax rate of 9.45% for 2007 (8.90% for 2006) after taking into

account the trends over the years and market situations

• Cost of Equity is the return expected by the investors to compensate them for the

variability in returns caused by

0

200

400

600

800

1000

1200

1400

2005

1014


2005 2006 Capital Employed (COCE)

360 163 2200 2515

Average Capital Employed : (1) + (2) 2560 2677 Cost of Debt, post-tax % 3.38 5.9 Cost of Equity % 15.5 16.38 Weighted Average Cost of Capital % (WACC) 13.8 15.74 COCE : (3) x (6) 353 421

Economic Value Added (EVA) Profit after tax, before exceptional items 1355 1540 Add : Interest, after taxes 12 7 Net Operating Profits After Taxes (NOPAT) 1367 1547

as per (7) above 353 421 (11) 1014 1125

Cost of debt is taken at the effective rate of interest applicable to an “AAA” rated


considered a pre tax rate of 9.45% for 2007 (8.90% for 2006) after taking into

account the trends over the years and market situations.

Cost of Equity is the return expected by the investors to compensate them for the

variability in returns caused by fluctuating earnings and share prices.

2005 2006 2007

10141125

1340


2007

382 2402

2785 6.24 17.59 16.03 446

1769 17

1786 446 1340

Cost of debt is taken at the effective rate of interest applicable to an “AAA” rated


considered a pre tax rate of 9.45% for 2007 (8.90% for 2006) after taking into

Cost of Equity is the return expected by the investors to compensate them for the

38 | P a g e


Du Pont Analysis

The data used to calculate all the ratios used in Du Pont chart are shown below:

Analysis

• HUL has a lower ROTE mainly because of low operating profit (PBIT) and

comparatively higher capital employed. This has been the recent trend in past 5 years

when HUL is trying to expand and hence incurring more cost on it, as a result its non-

trade investment is quite low as compared to other competitors who have been

operating in market for a quit long time.

• PBIT/SALES are less for HUL mainly because of higher EXP/SALES.

• SALES/TA of HUL is more than the industry average mainly because of lower Total-

Assets, which in turn is due to lower Current-Assets.

• SALES/CA is also quite high for HUL because of lower amounts of ‘OTHER CA’

and ‘LOANS & ADV’, or in other words, huge SALES/OTHER CA and

SALES/LOANS & ADV.

• As explained earlier, Capital Employed of HUL is low mainly because it has low Net

Worth and it has raised lower amount of Long Term.

ROTA = PBIT / Total Asset (1.63)

PBIT / Sales (0.16)

COGS / Sales (0.45)

Expenses / Sales (0.87)

Depn. / Sales (0.01)

Sales / Total Asset (9.65)

Sales / FA (0.08)

Sales / CA (0.04)

Sales / Debtors (0.30)

Sales / Cash (0.53)

Sales / Inventory (0.07)

39 | P a g e


Recommendation downgraded to Sell

Over the last two years, HUL’s business has turned around buoyed by stronger topline growth,

improvement in margins and higher fiscal benefits. Going forward we are becoming concerned

about renewed competitive pressures and hence believe earnings growth will be below market

expectations. Coupled with rich valuation I believe downside risks are high. Key trigger will

likely be consensus earnings downgrades beginning post the September quarter results due at the

end of this month.

Henceforth, I am downgrading HUL to Sell for the fo llowing reasons:

� Earnings momentum is slowing – HUL’s 1H 2006 profit grew 30% Y-o-Y. In the

second half of the year profit growth to slow to just 13% Yo-Y. While 1H had the benefit

of positive base effect, this plays negatively in 2H. Overall, I believe the turnaround in

HUL is now behind us and normalized earnings growth of 15% in 2007 is unexciting.

� Competitive issues continue to persist – HUL’s topline has benefited from volume

rebound led by sharp price cuts and rising income levels. However, it is disappointed by

the fact that HUL’s market share in most of its key categories is either flat or down

despite substantial jump in advertising costs over the last 2 years. Going forward, while

40 | P a g e


Procter & Gamble (P&G) remains a latent risk, we believe there will also be increasing

risk from ITC’s likely launch of new FMCG products.

� Valuation is rich – Over the last two years, HUL has re-rated from its trough P/E of 20x

to now 30xDec07E. In my opinion this is excessive for a business forecast to grow profits

at 15% CAGR.

Risks for Sell recommendation:

• Can topline growth exceed expectations? – Given its diversified product range and

distribution depth, HUL is well positioned to benefit from growing income levels.

Indeed, we have already seen this in the last two years with volume growth improving to

double digits in shampoos, detergents and skin care and to high single digit in soaps. The

key question is – does it get any better from here? I have some doubts owing to likely

new competition from ITC and also poor monsoons this year. Should HUL resort

aggressively to the other topline driver – price, then it may end up re-visiting the

problems of low priced competition.

• Growing organized retailing – opportunity or obstacle? – A number of large corporate

houses have announced plans to start food and grocery retailing. This may substantially

reduce wastage in the farm economy and thereby boost demand for HUL’s products. On

the other hand, trade margins may rise with bargaining power moving from HUL to

organized retailers. It is at this stage difficult to comment on the timing of these possible

developments. I believe in the initial stages, organized retailing may be either neutral or

positive for HUL but will likely hit negatively in a few years time.

• New management, new processes – Contrary to the tradition of last two decades when

HUL was run by local managers, Doug Bailley, an expatriate and turnaround expert from

South Africa, has been appointed the MD. This may possibly lead to new processes and

culture with more focus on product innovation and new avenues of cost cutting. However

we think the near term impact on earnings will likely be small.

41 | P a g e


Competitive issues – The worst is not over

Looking back the problems in HUL began in early 2000 when focus on innovation began to

reduce and retail price increases were sharp which led to mushrooming of regional low-priced

competition. I believe today HUL is a far improved company with greater focus on innovation

and a lot more sensitivity towards maintaining the appropriate price value equation. Yet, my key

concern is HUL’s market share is not growing despite increased advertising costs over the last

two years.

P&G – Peaceful co-existence for how long?

I saw the P&G offensive in March 2004 when they cut detergent prices by 30% forcing HUL to

follow suit. Since then there seems to be some pricing power coming back and there appears to

be a relatively peaceful co-existence between the two companies. However, I believe it is a

matter of time before P&G expands its product portfolio in India and intensifies the competitive

pressure on HUL. P&G is a global giant but India is perhaps the only large market where its

business is less than 1/5th of Unilever’s business. With emerging markets being a priority for

global companies we believe P&G will eventually increase its efforts in India.

ITC – Emerging competition

The second major threat I foresee is emerging competition from ITC. The trade participants

indicate that ITC is set to launch its personal care business over the next few months. While this

is a new category for ITC, I would be wary of this development from HUL’s perspective given

the former’s strong balance sheet, powerful distribution, desire to build a large FMCG business

and tremendous capability in executing its plans. A case in point is the flour business where in

the last 5-6 years ITC has become the market leader surpassing multinationals such as HUL,

Conagra, Pillsbury, etc.

Market share gains is a priority

Management has stated (and rightly so) that market share gains is a priority. Given this strategy

and my belief that the Indian market will get even more competitive in the future, it implies that

advertising costs for HLL will rise faster than has been the case in the last two years. Indeed in

1H 2006, advertising costs have risen 32%. I expects ad-spend to rise 29% in the current year

and 18% CAGR next two years. In terms of % of domestic consumer sales, I expect the ratio to

42 | P a g e


increase to 12.6% in 2008, up from 10.1% in 2005 (see chart 3). I expect a large part of this

increase to be funded by savings from crude oil linked raw material costs.

HUL’s market share not rising despite higher advert ising

HUL’s advertising costs increased 10% in 2004 and 20% in 2005. As a percentage of domestic

consumer business, it has improved from 8.6% in 2003 to 10.1% in 2005 (see chart 3). This has

however not resulted in market share gains in its key categories (see chart 4). Soap and

toothpaste shares continue to fall and skin and detergent shares are largely flat. The only bright

spot is shampoos where shares are on an upward trend.

43 | P a g e


Peer Group Comparison

• QoQ volume growth shows mixed trend: 2QFY09 volume growth shows mixed

trend across companies and product categories. Companies such as Dabur, Godrej

Consumer, GSK Consumer and ITC have reported QoQ increase in volume growth by 1-

4%. HUL, Asian Paints, United Spirits and Colgate have reported lower QoQ volume

growth by 1-4%. YoY trend still shows 3-5% higher volume growth for most of the

companies in our coverage universe. Our FMCG universe posted 19.9% YoY growth in

revenue in the quarter ended September 2008.

• Input costs impact gross margins by 382bp (excluding ITC): The impact of a

decline in raw material cost is not reflected in the September quarter results, as most

companies have been carrying inventories at higher levels. Gross margin for our coverage

universe declined 220bp YoY. Excluding ITC, the decline in gross margins is 382bp.

Small cap and mid-sized companies reported gross margin decline of 630bp and 420bp

respectively while large caps gross margins improved by 90bp (due to 330bp expansion

in ITC gross margins led by cigarettes). Meltdown in commodity prices is expected to

increase profit margins in the December quarter. Margin expansion beyond that would be

category specific, and would depend on the competitive intensity and strength of the

market leader in that segment.

• Cost control restricts EBITDA margin decline to 220bp: Our FMCG universe

companies were able to restrict EBITDA margin decline to 220bp by focusing on cost

control measures in adspend and other overheads. Advertising spend grew by 27% YoY

growth in June 2008. Lower growth in other expenditure also resulted in a positive

operating leverage. EBITDA growth for our coverage universe was just 6.5% YoY.

• Mid-sized companies continue to outperform: Mid-sized (based on market cap)

companies in our coverage universe continue to outperform others. Sales growth for mid-

sized companies is 23.7% versus 21.1% for small companies and 17.4% for large

companies. EBITDA of these companies have grown by 13% compared with decline of

6.1% for small caps and growth of 7.6% for large caps. EBITDA margin erosion for

midcaps has been 160bp versus 330bp (for small caps) and 190bp (for large caps).

Midcaps have reported 12.1% PAT growth versus 6.1% for small caps and 5.1% for large

caps.

44 | P a g e

• Challenging times ahead but softer raw material prices cou

profitability: Most FMCG companies are positive on long

short-term outlook is uncertain due to uncertain economic environment and erosion in

purchasing power. Although no clear signs of a downturn are visible, select pro

segments are witnessing

impact near term volume growth. We expect full impact of price increases to reflect in

the coming quarter, which might show lower volume growth on a QoQ basis. We expect

margin expansion for most of the companies in our universe from 3QFY09 as the full

benefits of decline in input cost and price increases are reflected. We believe that

companies with a presence in product segments that lack substitutes, high consumer

switching costs and strong pricing power, will emerge stronger in this period. We rate

ITC as our top pick in large caps. United Spirits and Nestle are top picks in the mid

space, while we rate Marico Industries as our top pick in small caps.


Challenging times ahead but softer raw material prices cou

Most FMCG companies are positive on long-term growth potential; the

term outlook is uncertain due to uncertain economic environment and erosion in

purchasing power. Although no clear signs of a downturn are visible, select pro

segments are witnessing down trading and a shift toward small packs, which might






hing costs and strong pricing power, will emerge stronger in this period. We rate

ITC as our top pick in large caps. United Spirits and Nestle are top picks in the mid

space, while we rate Marico Industries as our top pick in small caps.


Challenging times ahead but softer raw material prices could boost

term growth potential; the

term outlook is uncertain due to uncertain economic environment and erosion in

purchasing power. Although no clear signs of a downturn are visible, select product

and a shift toward small packs, which might






hing costs and strong pricing power, will emerge stronger in this period. We rate

ITC as our top pick in large caps. United Spirits and Nestle are top picks in the mid-cap

45 | P a g e

HUL and Dabu r emerge most aggressive in product launches

HUL and Dabur have been on the forefront for launch of new products and variants. HUL has

launched new variants across segments

into the ready-to-eat segment under the Knorr brand. Dabur has focused on the Gulabari brand in

Skin Care and Dazzl brand in Home Care. GCPL has launched its power hair dye, Godrej Hair

Expert in four new colors. ITC continues to launch new variants in its Personal Care and Foods

range. We expect new launches to gain momentum in the coming months with players like

Dabur, Nestle, ITC and HUL being in the forefront for new launches.


r emerge most aggressive in product launches


launched new variants across segments — prominent being Rin Matic in detergents and entry

nder the Knorr brand. Dabur has focused on the Gulabari brand in



We expect new launches to gain momentum in the coming months with players like

Dabur, Nestle, ITC and HUL being in the forefront for new launches.



prominent being Rin Matic in detergents and entry

nder the Knorr brand. Dabur has focused on the Gulabari brand in



We expect new launches to gain momentum in the coming months with players like

46 | P a g e


Top-2 Buys Top-2 Switches

ITC Hindustan Unilever

• Adverse regulatory environment in

cigarette business is near its peak; 75-80%

non-filter conversion rate and price

increases have ensured 12-15% PBIT

growth.

• Increase in paper capacity by 50% and pulp

capacity by 100%, will start contributing

positively in another 3-6 months and would

boost sales and profits from 2HFY09.

• Rising consumer acceptability in Skin Care

is positive due to 20-25% EBITDA

margins and market size of more than

US$2b.

• HUL’s volume growth has declined from

10.4% in Q1CY08 to 8.4% in 2QCY08 and

6.8% in 3QCY08. We expect volume

growth to decline to 5% levels in the

coming quarter.

• The share in toilet soaps has declined by

around 400bp to 50.2%. Toilet Soaps

contribute 25% to total sales and 35% to

the PBIT of the company.

• HUL’s attempt to create a strong presence

in the high potential food market has seen

poor implementation.

United Spirits Dabur India

• United Spirits has posted 16% volume

growth in 1HFY09; we expect 12-15%

volume growth in the coming years due to

60% share in IMFL, strong brands and

presence across price points and segments.

• Input cost pressures are expected to subside

as the prices of molasses, ENA and glass

bottles are expected to decline due to more

than 50% decline in crude prices.

• We expect the company to sell treasury

stock (17.75m shares) in the coming 12-15

months to reduce debt (US$619m from

Citibank, GBP325m from ICICI Bank and

rupee borrowings of Rs14b).

• Dabur India has planned capex of Rs2-2.5b

for capacity expansion before

implementation of the sunset clause for

excise and income tax benefits in 2010.

• It plans to open 15-18 NewU stores in the

coming 6-8 months to take advantage of

decline in lease rental rates. I expect long

gestation period as Health and Beauty

stores as a concept store is yet to catch up

in India.

• Performance in Skin Care and Household

Care has been below expectations. Further,

high growth segments like juices are

witnessing cut throat competition.

47 | P a g e


Conclusion

FMCG companies are fighting to stand out amid the clutter of a massively vigorous and

strengthening consumer market. To keep consumers interested India's brands are diversifying

well-loved favorites by entering new FMCG territory. It is quite common for emerging market

companies to want to sell their share of the business to their global partners. In case the global

company is willing to acquire the local partner, the latter would improve its negotiating power

and strengthen its position.

FMCG sector is long established and over the years, sustaining ups and downs of the Indian

economy. Thus the Critical operating rules in Indian FMCG sector can be summarized as

follows:

• Heavy launch costs on new products on launch advertisements, free samples and product

promotions.

• Majority of the product classes require very low investment in fixed assets

• Existence of contract manufacturing

• Marketing assumes a significant place in the brand building process

• Extensive distribution networks and logistics are key to achieving a high level of

penetration in both the urban and rural markets

• Factors like low entry barriers in terms of low capital investment, fiscal incentives from

government and low brand awareness in rural areas have led to the mushrooming of the

unorganized sector

• Providing good price points is the key to success.

Nevertheless, the FMCG growth story is here to stay. According to a survey on fast moving

consumer goods (FMCG) industry undertaken by Federation of Indian Chambers of Commerce

and Industry (FICCI), the growth momentum is likely to continue in the current fiscal as well,

spurred by lifestyle category goods. It includes products categories like skin care, shampoos,

deodorants, anti-aging solutions, fairness products and various men's products. Most are

counting on two factors as driving forces:-

• Increased market penetration in rural areas and

• A shift in urban outlook regarding expenditure.

48 | P a g e


Annexure

Balance Sheet of HUL

(Rs. in Crs.)

Year Dec 07 Dec 06 Dec 05 Dec 04 Dec 03

SOURCES OF FUNDS :

Share Capital 217.75 220.68 220.12 220.12 220.12

Reserves Total 1,221.49 2,502.81 2,085.50 1,872.59 1,918.60

Total Shareholders Funds 1,439.24 2,723.49 2,305.62 2,092.71 2,138.72

Secured Loans 25.52 37.13 24.5 1,453.06 1,603.70

Unsecured Loans 63.01 35.47 32.44 18.06 100.61

Total Debt 88.53 72.6 56.94 1,471.12 1,704.31

Total Liabilities 1,527.77 2,796.09 2,362.56 3,563.83 3,843.03

APPLICATION OF FUNDS :

Gross Block 2,669.08 2,462.69 2,375.11 2,314.22 2,141.72

Less : Accumulated Depreciation 1,146.57 1,061.94 951.17 891.08 846.09

Net Block 1,522.51 1,400.75 1,423.94 1,423.14 1,295.63

Capital Work in Progress 185.63 110.26 98.03 94.42 73.84

Investments 1,440.81 2,413.93 2,014.20 2,229.56 2,574.93

Inventories 1,953.60 1,547.71 1,321.77 1,479.58 1,402.45

Sundry Debtors 443.37 440.37 522.83 489.27 470.85

Cash and Bank 200.86 416.94 355.03 698.05 806.48

Loans and Advances 679.58 764.63 573.38 638.06 822.01

Total Current Assets 3,277.41 3,169.65 2,773.01 3,304.96 3,501.79

Less : Current Liabilities and Provisions

Current Liabilities 3,837.09 3,201.63 2,969.45 2,590.79 2,559.49

Provisions 1,273.89 1,321.42 1,158.87 1,123.46 1,311.11

Total Current Liabilities 5,110.98 4,523.05 4,128.32 3,714.25 3,870.60

Net Current Assets -1,833.57 -1,353.40 -1,355.31 -409.29 -368.81

Deferred Tax Assets 403.71 385.43 338.68 365.85 377.09

Deferred Tax Liability 191.32 160.88 118.54 139.85 109.65

Net Deferred Tax 212.39 224.55 220.14 226 267.44

Total Assets 1,527.77 2,796.09 2,362.56 3,563.83 3,843.03

Contingent Liabilities 494.37 476.4 468.34 476.41 478.34

49 | P a g e


Income & Expenditure Statement of HUL

(Rs. in Crs.) Year Dec 07 Dec 06 Dec 05 Dec 04 Dec 03 INCOME : Sales Turnover 14,930.12 13,321.08 12,464.87 11,550.76 11,785.67 Excise Duty 1,058.54 946.32 885.07 948.07 990.97 Net Sales 13,871.58 12,374.76 11,579.80 10,602.69 10,794.70 Other Income 667.03 998.94 455.33 596.95 568.71 Stock Adjustments 91.39 70.23 -181.13 -154.93 62.39

Total Income 14,630.00 13,443.93 11,854.00 11,044.71 11,425.80 EXPENDITURE : Raw Materials 6,323.23 5,659.96 5,302.58 4,837.02 4,945.87 Power & Fuel Cost 201.46 193.07 190.29 179.86 184.05 Employee Cost 799.6 784.21 734.95 720.65 687.57 Other Manufacturing Expenses 1,500.02 1,371.92 1,279.99 1,138.02 1,097.39 Selling and Administration Expenses 2,560.82 2,371.52 2,066.95 1,787.51 1,626.54 Miscellaneous Expenses 748.13 683.57 519.89 545.47 525.46 Total Expenditure 12,133.26 11,064.25 10,094.65 9,208.53 9,066.88 Operating Profit 2,496.74 2,379.68 1,759.35 1,836.18 2,358.92 Interest 26.49 13.97 24.2 136.25 69.12 Gross Profit 2,470.25 2,365.71 1,735.15 1,699.93 2,289.80 Depreciation 141.91 135.67 138.38 195.68 199.99 Profit Before Tax 2,328.34 2,230.04 1,596.77 1,504.25 2,089.81 Tax 313.07 310.29 220.66 265.17 410.03 Deferred Tax 56.17 -10.38 17.53 37.77 3.93 Net Profit before Minority Interest 1,918.87 1,894.16 1,358.58 1,201.31 1,675.85 Minority Interest 3.98 3.63 2.66 -2.19 -9.02 Net Profit after Minority Interest 1,914.89 1,890.53 1,355.92 1,203.50 1,684.87 Extraordinary Items 197.45 351.13 36.3 33.44 30.1 Adjusted Net Profit 1,717.44 1,539.40 1,319.62 1,170.06 1,654.77 Adjst. below Net Profit 150.01 -3.63 -2.66 7.09 104.39 P & L Balance brought forward 640.27 452.12 498.45 670.46 1,048.04 Appropriations 2,532.23 1,702.38 1,402.25 1,380.41 2,157.82 P & L Balance carried down 176.92 640.27 452.12 498.45 670.46 Dividend 1,976.12 1,325.48 1,100.62 1,100.62 1,599.21 Equity Dividend (%) 900 600 500 500 550 EPS before Minority Interest (Unit Curr.) 7.18 7.74 5.45 4.77 5.9 EPS after Minority Interest (Unit Curr.) 7.16 7.72 5.43 4.78 5.94 Book Value (Unit Curr.) 6.92 11.89 9.85 9.59 9.76

50 | P a g e


Ratio Analysis

Ratio Analysis assumes there is a relationship between certain aspects of the activities of the firm

as revealed in its income statement and balance sheet. Such a relationship indicates a pattern of

behavior.

Liquidity Ratio

Liquidity Ratios indicate the company’s ability to meet its short-term liability. These ratios

indicate the availability of liquid asset to meet short term obligations. Creditors usually check

this ratio to assess the ability of firm to meet its short term obligations.

Current Ratio

This is the ratio of the current assets and current liabilities, and is found out by dividing the

current assets by the current liabilities. This ratio is the indicator of the short-term liquidity

position of a firm. The conventional ratio is taken at 2:1 i.e., every current liability of Re.1

should be backed by a current asset of Rs.2.

Current Ratio = ��

��

Quick Ratio

Quick ratio is computed as follows:

Quick Ratio = ��

��

While calculating the quick ratio, inventories are excluded from current assets on the assumption

that they take more time for conversion than debtors or other receivables. The conventional ratio

is 1:1, i.e., every rupee of short-term liabilities must be backed by equivalent liquid assets. If,

however, the ratio is less than 1, then some portion of the short-term liabilities must be met from

the funds to be collected from outside.

Stock Turnover Ratio

This ratio indicates the number of times the stock is turned over, on an average, and must be

replaced during a given accounting period.

Stock Turnover Ratio = �� !��"��

�#

51 | P a g e


Debtors Turnover Ratio

This ratio shows the number of day for which credit is outstanding in the value of the amounts

owed by the debtors. It gives an indication of the efficiency or otherwise of the credit and

collection policies of the firm.

Debtors Turnover Ratio = �� $� ��

�� $��% ��

Average Debtors = �� $� �� $� ��

�

Average Daily Credit Sales = &�� '��

#()

Creditors Turnover Ratio

This ratio measures the promptness or otherwise with which payment is made to creditors for

credit purchase. It is measured as follows:

Creditors’ Turnover Ratio = ��

�� $��% *��

Leverage Ratio

Leverage Ratios indicate the company’s ability to meet its Long-term liability. These ratios

indicate the ability of the firm to return the investment made by its owners and debt providers in

the business, in case the company is closed down. These ratios are usually seen by the debt

providers or financial institutions in order to assess the risk involved in the business. If the firm

is closed down then first it is liable to pay back its loan and then if it is left with something that

belongs to the share holders.

Debt/Equity Ratio

This measures the relation between debt and equity in the capital structure of a firm and is

expressed as:

Debt/Equity Ratio = $� �

"+��%

Generally, the higher the ratio, the greater is the possibility of increasing the rate of return to the

equity, as long as the cost of debt is lower then the rate of return from the investment.

52 | P a g e


Fixed Assets Turnover Ratio

This indicates the extent to which the fixed assets contributed towards sales and is measured by:

Fixed Assets Turnover Ratio = ,��

!�-��

Profitability Ratio

Profitability Ratios show how successful a company is in terms of generating returns or profits

on the Investment that has been made in the business i.e. the Profitability ratios indicates the

ability of the firm to generate and distribute the profit. It can be broadly categorized into profit

generating ability (PGA) ratios and profit distributing ability (PDA) ratios. It can be said the

higher these ratios the better it is for the company.

Gross Profit Ratio

This ratio shows the amount of gross profit made out of the total net sales.

Gross Profit Ratio = .�� *��/��

,��

Net Profit Margin Ratio

This ratio shows the amount of net operating profit made out of the total net sales

Net Profit Margin Ratio = ,�� *��/��

,��

Operating Margin Ratio

This ratio shows the amount of operating expenses made out of the total net sales.

Operating Margin Ratio = �� "-��

,��

Return on Net Worth

This ratio gives an indication about the profit being made by the firm on the investment made by

the owner. This ratio is used to analyze the business from the perspective of the owner. RONW

is an indicator of profit distributing ability of a firm.

Return on Net Worth = *��/��

,�� 0��

53 | P a g e


Interest Coverage Ratio

This ratio measures the ability of the firm to meet its interest payments as they become due and

is computed as follows:

Interest Coverage Ratio = ,�� *��/�� 1�� &�-�

1��

Payout Ratio

Earning Per Share

EPS is an indicator of profit distributing ability of a firm. This ratio tells how much profit the

firm is making on owner’s investment on a single share of the company.

Earning Per Share = ,�� /�� 2�� -3 �� %��

,�� "+��% ��

Dividend Per Share

DPS ratio gives an idea of the actual distribution of profit to the owners i.e. profit distributed to

shareholders per share.

Dividend Per Share = ,�� /�� 2�� -3 �� %��

$�� $��

Dividend Payout Ratio

It is a ratio between dividends distributed to equity shareholders and net earnings of the firm.

Thus:

Dividend Payout Ratio = $�� $��

,�� "��4 100

54 | P a g e


Economic Value Added

M/s Stern Steward and Company (USA) pioneered the concept of Economic Value Added

(EVA) as a measure of the business performance in the 1980s. Any surplus generated from

operating activities over and above the cost of capital is termed as EVA

Operationally, a firm’s EVA is the excess of its after-tax operating profits over the required

minimum rate of return that investors could get by investing in securities of comparable risk, i.e.,

EVA = NOPAT – (WACC 4 TCE3

where,

NOPAT = Net Operating Profit after Tax, i.e., Net Profit + Interest Expenses

+ Non-Operating – Non-Operating Income : Stern-Stewart

adjustments

WACC = Weighted Average Cost of Capital expressed in percentage

= (Kd 4 W1) + (Ke 4 W2) + (Kp 4 W3)

where,

Kd = cost of debt after tax (interest rate)

Ke = cost of equity under Capital Asset Pricing Model (CAPM)

Kp = cost of per preference and W1, W2, W3 are the market value weights

assigned to debt equity and preference capital, respectively.

TCE = Total Capital Employed, i.e., the sum total of adjusted equity

Shareholder’s fund, all interest bearing obligations and preference share

capital circulating in the business.

55 | P a g e


Du Pont Analysis

Centrec’s Du-Pont Financial Analysis Model provides the framework to understand the drivers

of ROI. The Du Pont Model can be used to troubleshoot operational or structural problems from

a financial perspective, with a specific focus on ROTA, ROCE and RONW. It is an approach to

analyse the firm by evaluating inter relationships among many of the performance measures. In

the Dupont Analysis we try to find out what are the factors/drivers that are causing the profits to

move up. By identifying these factors/drivers we can concentrate on them and improve our

efficiency.

ROTA = PBIT / Total Asset

PBIT / Sales

COGS / Sales

Expenses / Sales

Depn. / Sales

Sales / Total Asset

Sales / FA

Sales / CA

Sales / Debtors

Sales / Cash

Sales / Inventory

56 | P a g e


Bibliography • www.naukrihub.com/india/fmcg/

• www.ibef.org

• www.hul.co.in

• www.hll.co.in

• www.myiris.com/shares/research/brokResMain.php?cSelect=4&icode=HINLEVER

• money.rediff.com/money/jsp/company.jsp?companyCode=12520002

• www.moneypore.com

• www.capitaline.com

• HUL Annual Report 2007

• Investor Presentation - Citigroup India Conference 2007

• Financial Policy and Management Accounting (Seventh Edition) – Bhabatosh Banerjee

- The End -

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